Tier 2 bonds of troubled Lakshmi Vilas Bank amounting to ₹318.2 crore are being written down before its merger with DBS Bank India, based on advice from the Reserve Bank of India.
“The Reserve Bank of India, vide their letter dated November 26, 2020 has advised the need to fully write-down the Series VIII, Series IX and Series X Basel-III compliant Tier-2 Bonds before the amalgamation comes into effect from the Appointed date that is November 27, 2020,” LVB said in a regulatory filing on Thursday.
Under the scheme of amalgamation approved by the Union Cabinet, LVB’s equity has also been written-off.
LVB does not have any AT-1 instruments. But as on September 30, 2020, it had Tier 2 instruments amounting to ₹318.20 crore out of total outstanding Tier 2 bonds of ₹368.70 crore containing loss-absorbency feature, which it had issued in three tranches.
“Given that Section 45 of the Banking Regulation Act has been invoked and the scheme has been notified, the bank is deemed to be non viable or approaching non viability and accordingly, the triggers for a write down of Basel III tier 2 bonds issued by the bank has been triggered,” LVB further said, adding that in light of the provisions, such Basel III Tier 2 bonds would need to be fully written down before the amalgamation of the bank comes into effect.
The bank had been making losses and with no effective solution to raise capital visible, the Reserve Bank of India had applied to the Centre for a moratorium under Section 45 of the Banking Regulation Act, 1949, which was imposed on November 17.
“These bonds, issued between March 2014 and June 2017 and maturing between March 2024 and September 2025, carry a high coupon rate, ranging between 10.70 per cent and 11.80 per cent,” said a person familiar with the development, pointing out that under current guidelines, Basel III compliant AT-1 and Tier 2 instruments can absorb losses through conversion into common equity or write-down.